Will intermodal lead the recovery?

If the past few months are any indication, the answer is yes. Just ask BNSF. BNSF Railway posted a double-digit return on net investment for the 12 months ending June 30, 2010—right through the worst of the Great Recession.

Its 10.25% ROI, virtually identical to the 10.20% of the prior-year period, clearly illustrates the railroad industry's overall strength in weathering the nation's worst economic storm in more than 75 years. For BNSF, it shows a railroad that rose to new heights of productivity and service quality, while maintaining a relatively high level of capital investment. So far, Warren Buffett's faith in BNSF and its management has paid the railroad's sole investor a handsome dividend (see Contributing Editor Larry Kaufman's sidebar, p. 18).

BNSF leads the industry in intermodal, coal, and grain traffic. Intermodal accounts for about 50% of BNSF traffic and 35% of revenue, and year-over-year growth has been leading the way to recovery. Industry volumes were up 17.2% in this year's second quarter, according to the Intermodal Association of North America. The Association of American Railroads reported late last month that U.S. rail intermodal volume for the week ending Aug. 21, 2010 set a new 2010 record for the second consecutive week, up 22% from the same week in 2009, and up 2.6% compared with 2008. Domestic intermodal set a new record high, growing 16.4% in the second quarter. International container traffic grew 20.9%.

Railway Age asked BNSF chief executive Matt Rose about the future of the railroad's lucrative intermodal franchise, as well as other pressing issues affecting not only BNSF, but the industry.

RAILWAY AGE: What investments are you making to protect and expand your intermodal market share in competition with long-haul trucking and all-water services to the East Coast? What do you envision for the longer term?

MATT ROSE: We continue to remain optimistic about the U.S. West Coast. We believe that, for the most part, the East vs. West argument has been answered in that a natural equilibrium has occurred with the West Coast gateway handling about 70% of Asia-North America cargo, though down from about 80% about 10 years ago. Relative to the East Coast, the major West Coast container ports have put billions of dollars into modernization and expansion, with plans to push handling capacity to more than 22 million TEUs.

We have also invested in our infrastructure to support West Coast port growth. Despite the downturn, we completed major facility expansion projects in both Los Angeles and Chicago, and we opened our new Memphis Intermodal Facility in 2009. For several years, we have been planning a new facility to replace our existing intermodal facility in Kansas City. And we continue to work with the Port of Los Angeles on a new near-dock facility to serve the Ports of L.A. and Long Beach—the Southern California International Gateway (SCIG).

RA: Overall, do you feel that intermodal is leading the recovery, as far as freight rail traffic is concerned?

ROSE: We started to see the economy recover last year. When you look at published industry data, you can see that pretty much all areas are up year over year. Intermodal does seem to have good momentum recently, especially in the international sector. Eastbound container import growth rates are pacing close to 30% this month.

RA: Other than intermodal, what improvements are you seeing in traffic, and where, now that the economy is starting to rebound? What's going on in terms of stored cars and locomotives being returned to service? Going forward, what are your projected equipment needs?

ROSE: As far as we can see, the worst of the recession is over and GDP growth is slowly beginning to come back with a couple of quarters of positive growth. According to the weekly carloadings from the AAR, pretty much every area is up year over year. We are starting to see volumes slowly pick up and are cautiously optimistic as we are still well below the levels we saw in 2006-2007. It may be three to five years before we are back to those peak levels. We currently have fewer cars and locomotives stored than we did previously and are bringing them back on line as the market demands.

RA: You have often described capital spending as being in three buckets—maintenance, catch-up, and expansion. How is 2010 playing out, and how is 2011 shaping up?

ROSE: Our 2010 capital commitment program was $2.4 billion, about $240 million lower than 2009. We have not released our 2011 capital plan.

RA: The freight railroads collectively have raised serious concerns about higher-speed rail with regard to capacity, FRA on-time performance requirements, and maximum speeds. What is your outlook now on BNSF's ability to support higher-speed rail?

ROSE: Over the years, BNSF has been able to accommodate passenger rail service and protect the near- and long-term capacity and growth interests of our freight customers throughout the country. We have a great track record of performance with Amtrak and state and local governments that sponsor passenger service. As CEO of BNSF, my priority is to protect the current and future capacity for the benefit of freight users. However, by sticking to what are now our well-known joint-use passenger rail principles, we've been able to reasonably host more passenger service.

The President and the Congress have a lot riding on PRIA (Passenger Rail Investment and Improvement Act of 2008) and the stimulus funding aimed at a higher performing passenger rail network. We certainly are willing to work toward that with adequate and appropriate levels of public participation.

With regard to achieving a truly "high speed" passenger network, I do think we need to have reasonable expectations of what the public desires and what can be reasonably achieved on a freight network.

First, there are probably only a handful of true high speed rail options for our nation. Certainly both coasts, with some areas of great density in the middle of the country.

Second, as I have testified before Congress, high density passenger rail above 90 mph generally must be separated from freight service.

Third, and finally, service at 110 mph and above must be on grade separated, sealed corridors. This is for the public's safety, not just the efficiency of the passenger service.

My friends in the passenger business and at the FRA may push back on the latter two propositions, but I really believe that these are the going-in presumptions and if there are any exceptions, they must be taken on a case-by-case basis. It's a matter of safety, physics, and, quite frankly, funding. The public benefit is not likely to outweigh the costs at those speeds on jointly used tracks.

As for "true high speed rail," I'm on record with predicting that a fully functional, true high speed, grade- and freight-separated passenger rail network that connects approximately 20 city pairs could cost up to a trillion dollars. This vision will take a long time to achieve, but I also believe Americans would pay for it. If reducing carbon emissions and foreign oil dependence is truly a national imperative, this is a necessary investment.

RA: Now that you are part of Berkshire Hathaway, has anything changed and if so, what?

ROSE: I often get asked what the difference is now that we are part of the Berkshire Hathaway family. The biggest change is that we no longer have to host quarterly conference calls and provide the same level of detail on our financials. Other than that, it's pretty much business as usual.